How Much is Capital Gains Tax on Rental Property in the UK?

January 9, 2025

Selling a rental property in the UK often incurs Capital Gains Tax (CGT). Here’s a breakdown to help you understand:

1. What is Capital Gains Tax (CGT)?

Capital Gains Tax (CGT) is applied to the profit, or “gain,” made from selling an asset, such as a rental property, that has appreciated in value. The tax is calculated based on the difference between the purchase price and the sale price, after deducting allowable expenses.

2. CGT Rates for Residential Property

The amount you pay is determined by your income tax bracket:

Basic-rate taxpayers: 18% on the gain (after deducting allowances).
Higher and additional-rate taxpayers: 28% on the gain.

For basic-rate taxpayers, the 18% CGT rate applies only if the gain (added to your other income) keeps you within the basic-rate income tax band. If the gain pushes your total income into the higher-rate band, part of the gain will be taxed at 28%.

Example:

Basic-rate threshold: £50,270
Income: £40,000
Gain after allowances: £20,000
£10,270 of the gain stays in the basic-rate band and is taxed at 18%.
The remaining £9,730 is above the threshold and taxed at 28%.

For higher-rate and additional-rate taxpayers, the full gain is taxed at 28%.

3. CGT Allowances (2024/25)

Each individual has a £3,000 annual tax-free allowance for capital gains. Any gains above this allowance are taxed at the applicable rates.

4. Allowable Deductions

To reduce your taxable gain, you can deduct:

Acquisition Costs: Stamp Duty, legal fees, etc.
Improvement Costs: E.g., adding a conservatory or extension.
Selling Costs: Estate agent fees, solicitor fees, etc.

5. Special Considerations

If the property was your main residence for part of the ownership, you may qualify for Private Residence Relief (PRR), which reduces your taxable gain.

6. Reporting and Paying CGT

You must report the sale and pay the CGT within 60 days of completing the property sale.
Use HMRC’s ‘Real-Time Capital Gains Tax Service’ to declare and pay the tax.

7. Steps in the Example Calculation

Calculate the Gain:

Gain= Sale Price − Purchase Price
100,000 = £300,000−£200,000

Subtract Allowable Deductions:

Allowable deductions (e.g., legal fees, improvement costs) reduce the taxable gain.

Taxable Gain= Gain – Deductions
£90,000= £100,000−£10,000

Apply the CGT Rate (Higher-Rate Taxpayer)

As a higher-rate taxpayer, the entire taxable gain is taxed at 28% for residential property.

CGT= Taxable Gain × 28%
£25,200= £90,000 × 0.28

Important Notes:

Annual CGT Allowance: If the taxpayer has not used their annual CGT allowance (currently £3,000 for 2024/25), they can deduct this before applying the tax rate.

Taxable Gain After Allowance= £90,000 − £3,000 = £87,000
CGT = £87,000 × 0.28 = £24,360

This example assumes the individual has already accounted for or used up their allowance elsewhere.

Need Help?

CGT can be tricky. Speak to a tax advisor to ensure you make the most of all available allowances and reliefs.